The Right Way to Redress?

The period for responding to the Financial Conduct Authority’s (“FCA”) consultation on pension redress has ended with replies having to be submitted by 10 June 2017. The FCA is expected to issue a response in Autumn 2017.

So how did we respond….what did Spence think was the correct way to calculate pension redress payments?

Overall, we agreed with many of the proposals put forward by the FCA with an overriding requirement that the methodology had to be simple. We welcomed changes that simplified the calculations such as how to allow for expenses prior to retirement and how to allow for the fact that individuals may take a tax free cash sum at retirement.

We deviated in one main area – we do not believe that the level of redress should mirror insurer pricing, primarily because individuals no longer have to purchase an annuity at retirement (and are clearly not doing so). Allowing for insurer pricing provides individuals with an excessive level of redress that is not reflective of the cost of providing the benefit in the DB arrangement.

We felt there should be an allowance for the inflation risk premium in deriving the inflation assumption. Index linked gilt prices continue to be impacted by under supply/over demand in the market, artificially increasing inflation assumptions that are based on market prices. This is even more apparent in the current environment where demand for index-linked gilts remains high and inflation assumptions have continued to increase. Our view is that there should be an allowance for the inflation risk premium, this should be market related, and it should be provided each quarter with the updated financial assumptions.

Finally, we have a different view on appropriate mortality assumptions. The FCA has suggested a mortality basis in line with that used by insurers in pricing annuity contracts. However the individuals considered are (or have been) members of defined benefit pension schemes. We believe that tables based on the experience of Self Administered Pension Schemes (SAPS) would be more appropriate to reflect the expected mortality of these individuals. We also believe that the most up to date experience from the CMI should be adopted for mortality improvements i.e. the 2016 CMI tables. Overall this would result in lower life expectancies and lower redress payments, and would reflect our view that the level of redress should not reflect insurer pricing.